The Bank of Canada’s December meeting minutes show that confidence in the economy is growing, despite ongoing uncertainty. Policymakers noted that the global economy is doing better than expected, thanks to strong consumer spending in the US and investments in AI. However, there are still risks related to tariffs. In Canada, updated data indicates a more robust economy for 2025, with GDP growth at 2.6% in Q3, partly due to lower imports. The job market has also improved, with unemployment dropping to 6.5%. However, most of the new jobs are part-time. Inflation decreased to 2.2% in October, while core inflation remains around 2.5%.

Trade Policy Risk

The Governing Council sees trade policy as a major risk, especially with the upcoming CUSMA review. Despite the economy showing less slack, the Bank decided to keep the policy rate steady at 2.25%. They emphasized that they are ready to adjust if needed. The Bank’s main role is to set interest rates to control inflation, which impacts the strength of the Canadian Dollar. Quantitative easing (QE) is used in serious situations and typically weakens the CAD, while quantitative tightening (QT) does the opposite and usually strengthens it. QE was used during the financial crisis from 2009 to 2011. QT occurs during recovery to manage rising inflation and generally strengthens the CAD. With the Bank of Canada’s cautious pause, the market is characterized by uncertainty, leading to short-term volatility rather than a clear trend. The Bank is maintaining its policy rate at 2.25% and has not given strong hints about its next steps. As a result, the Canadian dollar is likely to react sharply to new economic data. This means any current investment plans should be flexible and adaptable. We are closely watching the November Consumer Price Index (CPI) report, which Statistics Canada will release next week. After October’s inflation rate fell to 2.2%, another low reading would support the Bank’s patient approach and might weaken the Canadian dollar. On the other hand, a surprise increase, similar to the persistent core inflation seen in 2024, could lead to discussions about a rate hike, driving up the currency.

Upcoming Labour Force Survey

The Labour Force Survey coming in the first week of January is another important event for the market. Recently, unemployment dropped to 6.5%, but the minutes noted a mixed quality in hiring—a trend we’ve seen at times. For instance, late-2023 reports showed gains in part-time jobs, but losses in full-time positions. A strong report with good full-time job growth would indicate economic strength, while another weak report would confirm the Bank’s concerns and limit the upside for the loonie. Given the current uncertainty, using options strategies might be especially beneficial in the coming weeks. We suggest considering straddles or strangles on USD/CAD futures to position for a significant price movement without having to guess the direction. This approach would profit from any sharp shift following the upcoming inflation or jobs data, whether the news is positive or negative. Looking ahead, the CUSMA review set for July 2026 poses a significant risk that the Bank has highlighted. Although this is several months away, we can start preparing for potential political tensions by looking at longer-term derivatives. Acquiring long-term put options on the Canadian dollar could be a smart way to hedge against the rising uncertainty that will likely build up before the review of the trade agreement. Create your live VT Markets account and start trading now.

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